Business Laws Oxford University Press

Business Laws

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3Oxford University Press is a department of the University of Oxford.

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ISBN-13: 978-0-19-948172-9ISBN-10: 0-19-948172-5

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Prefaceiv

Features of

CasesProvides numerous case studies to explain various laws.

TablesA large number of tables are

provided for easy understanding of concepts.


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the Book

ExercisesIncludes relevant questions at

the end of every chapter for students to practice.

Solved and Model Question PapersHelps to understand and prepare for the university examination.

Model Question Papers(without answers)

FIRST SET

Group – A 8 × 2 = 16

1. (a) “A threat to commit suicide amounts to coercion”-Comment.

(b) What is a standing offer?

(c) What is meant by passing of property?

(d) What are ordinary damages?

(e) Define “Contract of sale” under the Sale of Goods Act, 1930.

Model Question Papers (with answers)

FIRST SET

Group – A

Question A-1(a) What is Countermanding of a cheque? 2 × 8Answer “Countermanding of a cheque” means cancellation of a cheque. It may be done by the drawer of a cheque by issuing “Stop payment” by the drawer of a cheque to the bank. Under some circumstances a cheque may be countermanded by the banker.Question A-1(b) Are promissory notes bearer instruments anymore?Answer Normally, a promissory note cannot be payable bearer on demand. It is prohibited by Section 31 of the Reserve Bank of India Act, 1934. Only Reserve Bank of India or The Central Government can issue negotiable promissory note.Question A-1(c) Define acceptance for honour.Answer When a bill of exchange or promissory note is dishonored for non-acceptance or non-payment;


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PrefaceThe laws governing the appropriate ways to carry out business in India date back to the late nineteenth century. The laws created then, such as the Indian Contract Act, 1872, are still relevant and in effect today. Some of the Acts have been amended from time to time to make them relevant to modern business practices. Still others, like the Companies Act, 1956 have been thoroughly overhauled to make them contemporarily relevant. Moreover, new laws have been framed when entirely new methods of transacting businesses have come up, such as the IT Act, 2000 which was necessitated due to influences of modern-day technologies such as computers and the Internet.

The University of Calcutta (CU) has combined the study of several relevant Acts, which are crucial to a student of commerce, in its first semester course Business Laws. The aim of the course is to provide a thor-ough understanding of various laws that a business practitioner will need to know.

About the Book

Business Laws is designed to serve as a textbook for first semester undergraduate commerce students of the CU. It aims to provide simple and easy coverage of various laws through its lucid explanations of relevant sections, discussion of case law, and landmark cases with facts and judgements.

Key Features

• Appropriatediagramsareusedwherevernecessaryforclearunderstandingof theconcepts.• Threesetsof UniversityQuestionPapersareprovidedwithsolutionstoshortquestions.Twosetsof model

questions are also provided for practice.• Exercisesareprovidedattheendof everychapter.Theyaredividedintoshort,medium,andlongques-

tions in keeping with the university examination pattern.• Achapter-wisequestionbankof solvedquestionsisprovidedattheendof thebook.• Casestudiesalongwithfactsof thecaseanddecisionof thecasearegiveninsufficientnumberstoenrich

the book.• Aseparatecollectionof caselawsisprovidedattheendof thebook.• Severalillustrativeexamplesareprovidedthroughoutthebooktomakelearningof difficultlawsmoreeasy

and understandable.• Aglossaryof keywordsisprovidedattheendof eachchaptertorecapitulatethenewlegalwordsthatthe

students learn while reading the chapters.

Structure and Content of the Book

The book comprises 28 chapters. A brief description of the contents of each chapter is provided below: Chapter 1 introduces the subject by discussing the evolution and necessity of business laws.Chapter 2 deals with jurisprudence. It explains the philosophy behind law.Chapters 3 to 10 deal with the Indian Contract Act, 1872. The Contract Act is considered to be fundamental to business law and it lays down the foundation of other laws.Chapters 11 to 14 cover the Sale of Goods Act, 1930, which deals with sales and agreement to sales and is considered as the cornerstone of business deals. Chapters 15 to 20 deal with the Indian Partnership Act, 1932, which defines and amends the law relating to partnership and different types of partnership.Chapter 21 to 23 cover The Negotiable Instrument Act, 1881. The Act deals with exchange of money with national and international implication.


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viiPreface

Chapters 24 to 27 cover the Consumer Protection Act, 1986. The Act deals with the rights of the consumers and the roles played by the District forum, the State Council, and the National Council. Chapter 28 covers Limited Liability Partnership Act, 2008 which deals with the laws concerned with the setting up of partnership firm with limited liability, perpetual existence, and separate entities.

Acknowledgements

We would like to thank Dr Ila Das and Sweta Roy for their illustrative support, Prof. Pranab Kumar Bhattacharjee and Dr Tarashankar Roy for acting as fountains of inspiration, and also Indranil Das and Swapnil Roy for assisting us in the development of this book.

Special thanks goes to Dr Sagata Sen, Pro VC (Academic), University of Calcutta, Prof Dhruba Ranjan Dandapath, University of Calcutta, Dr Malayendu Saha, Former Vice Chancellor, University of Kalyani, Dr Ashis Sana, Department of Commerce, University of Calcutta, Dr Subiresh Bhattacharya, Principal, Shyapa Prasad Mukherjee College Dr Ashok Mukhopadhyay, Principal, Seth Anandaram Jaipuria College, Dr Sukomol Dutta, Principal Naba Ballygunge Mahavidyalaya, Dr Bhaskar Purkaestha, Principal Dinabandhu College, Prof. Soumendu Sengupta, Former Principal, Maheshtala College, Dr Manturam Samanta, Principal, Maharaja Manindra Chandra College, Dr Asit Kumar Sarkar, Principal,Acharya Girish Chandra Bose College Dr Dipak Kar, Principal Asutosh College, Dr Sandip Kumar Paul, Principal, City College of Commerce and Business Administration, Dr Subir Kumar Dutta, Principal, Khudiram Bose Central College, Dr Indrani Saha, Teacher –in –Charge, Sri Shikshayatan College,, Prof Radhanath Pain, Prof Barun Kumar Das and Banolata Das, Seth Anandaram Jaipuria College, Dr Biswajit Bhadra, Netaji Nagar College, Dr Bhaskar Purakayastha, Principal Shibpur Dinabandhu Institution, Prof Samir Kumar Sinha, Prof Jayanta Nath Kundu, Prof Durgadas Bhattacharyya of Jogesh Chandra Chaudhari College, Prof Mukul Saha, Prof Shrutinath Praharaj, Raja Peary Mohan College, Prof Sanjib Roy, Sammilani Mahavidyalaya, Prof Ratan Sen Sivanath Sastri College, Prof Sukant Mukherjee and Prof Sanjoy Roy (HOD), Acharya Girish Chandra Bose College, Scott Lane, Prof Biswajit Sarkar, Bangabashi College (Morning) Prof Arun kumar Mondal, BangabasiCollege (Day),Prof SolankiGjhhosh,BangabashiCollege (Evening),Prof RanjanSensharma,Herasmba Chandra College, Dr Sarada Prasad Dutta, Gour Mohan Sachin Mondal Mahavidyalay, Bireswarpur, Prof Arup Banik and Prof Radhagobinda Basak, Maharani Kasiswari College, Kolkata, Prof Supriyo Bhattacharjee Maharaja Sris Chandra College, Prof Krishn Mukherjee, Maharaja Manindra Chandra College, Prof Tamal Taru Roy, Naba Baligang Mahavidlaya, Prof Samrat Dhar, Rammohan College (Morning), Dr Tanuka Sen, Shri Shikshyatan College (morning), Prof Pradip Chandra Bagchi, New AliporeCollege(Evening),Prof DilipShah,TheBhawanipurEducationSociety(Morning),Prof PreetamBanerjee,wanipurEducationSociety(evening)alongwithothers.

We would also like to thank the editorial team of Oxford University Press for their constant support. Feedback and suggestions from knowledgeable quarters for improving the future editions is always welcome.

Sujit Kumar Das Pankaj Kumar Roy


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Brief ContentsFeatures of the Book ivPreface viDetailed Contents xRoadmap to Business Laws xvii

1. Introduction 1

2. Jurisprudence 4

3. Introduction to the Indian Contract Act, 1872 13

4. Offer, Acceptance, and Revocation 24

5. Consideration 39

6. Capacity of Parties to Contract 52

7. Free Consent 60

8. Void, Voidable, and Illegal Agreements 76

9. Discharge of Contract 82

10. Special Contract 99

11. Introduction to the Sale of Goods Act, 1930 116

12. Conditions and Warranties 128

13. Transfer of Ownership 138

14. Transfer of Title By Non-owners 144

15. Introduction to the Indian Partnership Act, 1932 151

16. Types of Partners 156

17. Registration of Partnership Firm 161

18. Minor’s Position in Partnership 164

19. Rights and Duties of the Partners 167

20. Dissolution of Firms 172

21. Negotiable Instruments Act, 1881 177

22. Endorsement 193

23. Dishonour of a Negotiable Instrument 197

24. Introduction to the Consumer Protection Act, 1986 207

25. Consumer Protection Council—Composition and Objectives 213


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ixBrief Contents

26. Consumer Dispute Redressal Agencies 216

27. Manner of Lodging a Complaint 219

28. Limited Liability Partnership Act, 2008 222

Case Laws 233Multiple-choice Questions 238Chapter-wise Solved Question Answers 247Three Sets of Model Questions with Answers 284University Solved Question Papers for 2014, 2015, and 2016 316Two Sets of Model Question Papers (without answers) 323About the Authors 325


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Detailed ContentsFeatures of the Book ivPreface viBrief Contents viiiRoadmap to Business Laws xvii

Module I 13

Unit I Indian Contract Act, 1872

3. Introduction to the IndianContract Act, 1872 13

History 13Object 13Meaning of Contract (Section 2) 14 Definition 14EssentialElementsof aValidContract 14 Agreement 14

Legal Relationship 15Lawful Consideration 15Free and Genuine Consent 15 Capacity of Parties Entering into Contract 16Lawful Object 16Agreements Declared Illegal or Void 16Certainty and Possibility of Performance 17Legal Formalities 17

Classification of a Contract 18Validity or Enforceability 18Mode of Formation of Contract 20Execution or Performance 20Parties of a Contract 21

Classificationof Contracts(EnglishLaw) 21

Formal Contracts 21Simple Contracts 22Contracts must be Registered 22

4. Offer, Acceptance, and Revocation 24

Introduction 24What is an Offer? 24Different Types of Offers 24

Express Offer and Implied Offer 24Specific Offer and General Offer 25Cross Offer 25Counter Offer 26Standing Offer 26

True Test of an Offer 26EssentialLegalRequirementsof anOffer 26Lapse of an Offer 28 Offer and Invitation to Offer Distinguished 28Offers Accepted with Special Conditions 29 Tenders 30 What is an Acceptance? 31 Who can Accept? 31 Rules Relating to Valid Acceptance 31 Acceptance by Conduct [Sec. 8] 34 Acceptance Subject to Contract 34

1. Introduction 1

2. Jurisprudence 4

What is Jurisprudence? 4 Different Schools of Thoughts on Jurisprudence 5 Nature of Law 5

Law and State 6 Law and Justice 7 Rule of Law 8 Sources of Law 8 Kinds of Law 10Interpretationof EnactedLaw 11 Interpretation of Statute 12


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xiDetailed Contents

Revocation of Offer and Acceptance 34 Communication of Offer, Acceptance, and Revocation 35

How to Communicate 35Offer and Acceptance by Post 36 Offer and Acceptance over the Telephone 36 Offer and Acceptance over Microphone 36 E-mail, SMS, MMS, and other Computerized Methods of Communication 37

When Communication is Complete? 37

5. Consideration 39

Introduction 39 Definition of Consideration 39 Offer and Acceptance without Consideration 41EssentialElementsof Consideration 42DifferencebetweentheEnglishandIndianLawRegarding Consideration 46

‘NoConsideration,NoContract’—Exceptionsto the Rule [Section 25 of Indian Contract

Act, 1872] 46 Rights of a Stranger to a Contract and of a Stranger to the Consideration 49

6. Capacity of Parties to Contract 52

Introduction 52Persons Incompetent to Contract 52

Who is a Minor? 52Why Should Minors be Protected? 53Law Regarding Minor’s Agreement 53Minor’s Liability For Necessaries 56Position of a Minor’s Guardian 57 Company Shares Held by a Minor 57Persons of Unsound Mind 57 Other Persons Considered to be DisqualifiedFor Contract 58

7. Free Consent 60

Introduction 60 Definition of Consent and Free Consent 60 Consent 60 Free Consent 60

Coercion 62Definition of Coercion 62

Effects of Coercion 62 Threat to Commit Suicide 63 Undue Influence (Section 16) 63 Undue Influence is Presumed to Exist 64 Consequences of Undue Influence 65 Contracts with Pardanashin Women 66

Fraud (Section 17) 66 Essential Elements of Fraud 67

Consequence of Fraud 68Misrepresentation (Section 18) 69

Unwarranted Statements 69 Breach of Duty 69 Mistake about a Subject Matter 70 Suppression of Vital Facts 70 What are Identifications of Misrepresentation? 70 Consequences of Misrepresentation 71

Limitation to the Right to Rescind 71 Mistake 71

Classification of Mistakes 72 Mistake of Law 73 A Mistake towards the Identity of the Person contracted with 73 Mistake of Fact 73

8. Void, Voidable, and Illegal Agreements 76

Introduction 76Definition of Void Agreement 76 Definition of Voidable Agreement 76Definition of Illegal Agreement 76

Nature of Void Agreements 77 Obligation of Parties under a Void Agreement 78

Illustrations 78 Restitution 78

Wagering Agreement 78 Definition 78Essentialsof aWageringContract 79 Wagering Agreement and Insurance Agreement 79

Wagering Contract and a Speculative Transaction 79Voidable Agreement 79


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Detailed Contentsxii

Consequences of Voidable Contracts (Section 64) 80 Mode of Communicating or Revoking Rescission of Voidable Contract (Section 66) 80

9. Discharge of Contract 82

What is Discharge of Contract? 82 Method of Discharge or Termination of Contract 82 Discharge by Performance 82 Discharge by Mutual Consent (Sections 62-67) 83

Remedies for a Breach of Contract 85 Accord and Satisfaction 85 Rescission 85 Waiver 85 Merger 86 Material Alteration 86

Discharge by Impossibility of Performance or Supervening Impossibility 86 Initial Impossibility (Sec 56 paragraph-1) 86 Subsequent Impossibility (Section 56 paragraph-2) 87 Doctrine of Frustration or Supervening Impossibility 87 Exceptions to the Doctrine of Frustration and Supervening Impossibility 91

Effects of Supervening Impossibility 92Discharge by Lapse of Time 92Discharge by Operation of Law 93Discharge by Breach of Contract 93

Anticipatory Breach of Contract 93 Consequences of Anticipatory Breach 94 Actual Breach of Contract 94 Remedies for Breach of Contract 95

Damages 95 Types of Damages 96 Penalty and Liquidated Damages 97

10. Special Contract 99

Contingent Contract 99 Rules Regarding Contingent Contract 100

Wagering Agreements 100 Rules Regarding Wagering Agreement 100

Difference between a Wagering Agreement and a Contingent Contract 101

Quasi-Contracts(Sections68–72) 101 Different Types of Quasi-Contracts (Sections 68–72) 101

Contracts of Indemnity and Guarantee (Section 124) 102

Contract of Indemnity 102 Contract of Guarantee 103 Distinction between a Contract of Indemnity and a Contract of Guarantee 104Bailment (Section 148) 104

Essential Features of Bailment 104 Duties of Bailor 106 Duties of Bailee 106 Effect of mixture 107 Rights of Bailor 107 Rights of Bailee 108 Termination of Bailment 108

Pledge 108 The Rights and Duties of the Pawnor and Pawnee 109

Difference between Pledge and Bailment 109Law of Agency 110

Essentials of Relationship of Agent and Principal or True Test of Agency 110

Procedure of Appointment of an Agent 110 Who may Employ Agent? 110 Who can be Appointed as an Agent? 111 Joint Principals 111 Methods of Creating Agency 111 Different Types of Agency 111 Agent’s Duties to Principal 112 Principal’s Duties to Agent 113 Agent’s Rights 113 Principal’s Rights 113 Sub-agent 114 Termination of Agency 114 Termination of Agent’s Authority 115

Unit II Sale of Goods Act, 1930

11. Introduction to the Sale of GoodsAct, 1930 116

Introduction 116 Definition 117

Formation of a Contract of Sale 117Sale and Agreement to Sell 118


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xiiiDetailed Contents

Sale 118Agreement to Sell 118 Differences between a Sale and an Agreement to Sell 119

EssentialElementsof aContractof Sale 119 Definition of Goods and their Classification 121 Existing or Future Goods 121

Price 122Stipulation as to Time 123 Destruction of Goods (Sections 7 and 8) 123Document of Title to Goods 123

Sale and Hire-Purchase Agreement 124 Distinction between a Sale and a Hire-purchase Agreement 125

Hire Purchase and Instalment Purchase 125Auction Sale or Sale by Auction 125

Rules of Auction Sale 126

12. Conditions and Warranties 128

Introduction 128Conditions and Warranty 128

Condition 129 Warranty 129 When a Condition can be Treated as a Warranty 130 Waiver of a condition voluntarily 130 Accepting a part of the agreement not severable from the whole 130

ExpressandImplied‘Conditions’and ‘Warranties’ 130

Express ‘Conditions’ and ‘Warranties’ 130

Implied Conditions 130MerchantableQuality[Sec.16(2)] 132Implied Warranties 134

Warranty of Quiet Possession [Sec. 14 (b)] 134

Warranty of Free from Encumbrances [Sec. 14 (c)] 134

Warranty as to Quality or Fitness by Usage of Trade [Sec. 16 (3)] 134

Doctrineof CaveatEmptoranditsExceptions 134 Principle of ‘Caveat Emptor’ 134 Exceptions to the Principle of Caveat Emptor 135

13. Transfer of Ownership 138

Meaning of Ownership Transfer 138Rules Relating to Transfer of Ownership 138Passing of Risk 139 When Does the Property Pass from the Seller to the Buyer (Sections 18 To 25) 139 Matters Relating to Contract of Sale Involving Sea Routes 142

14. Transfer of Title by Non-owners 144

Transfer of Ownership by Non-owners 144 Rights of the Unpaid Sellers and Remedial Measures 146

Unpaid Seller 147Rights of Unpaid Seller 147 Right of Stoppage in Transit [Sections 46(1) (b) and 50, 51, 52] 148 Right of Re-sale 149 Right of Withholding Delivery 149 Right of an Unpaid Seller against the Buyer Personally 149

Unit III Indian Partnership Act, 1932

15. Introduction to the Indian PartnershipAct, 1932 151

Brief History of Indian Partnership Act, 1932 151 Form of Business Organization Prevailing in India 151Definition of Partnership 152Who are not Partners? 152Partnership Firm 152 Legal Status of a Firm 152EssentialElementsof Partnershipforits Existence 153EssentialElementsandFeaturesof Partnership 153Test of True Partnership 154

16. Types of Partners 156

Types of Partners 156Types of Partnership Firm 157Limitation of Partnership Concept 158


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Detailed Contentsxiv

Difference between Partnership and Co-Ownership 158 Difference between Partnership and Club or Society 159

Difference between Partnership and Company 159

Limited Liability Partnership 159

17. Registration of Partnership Firm 161

Partnership Deed 161Registration Compulsory or not 162 Consequences of Non-registration [Section 69] 162 Non-Registration does not Affect in Some Cases 162

18. Minor’s Position in Partnership 164

Minor as a Partner 164 Rights and Liabilities of a Minor Partner (Section 30) 164Public Notice 165 Public Notice Regarding a Minor Partner 165Status of a Minor Partner 165

19. Rights and Duties of the Partners 167

Rights, Duties, and Liabilities of Partners 167Rights of a Partner 167Duties of a Partner 168Liabilities of a Partner 168

Relation of a Partner to a Third Party [Section 18 To 30] 169Partners as Agent of the Firm 169 Act done by the Partners for the Purpose of the Business of the Firm 169

Partner’sAuthorityinanEmergency Situation 170 Implied Authority or Relationship 170 Limitations on the Implied Authority of Partner 170

20. Dissolution of Firms 172

Introduction 172 Goodwill 172

Dissolution of Firms (Sections 39 to 47) 172

Meaning of Dissolution 172 Causes of Dissolution of a Partnership Firm (Sections 40, 41, 42, and 44) 173 Rights of Partners on Dissolution of a Firm 174 Liabilities of Partners on Dissolution of a Firm 174Settlement of Accounts 175Public Notice in Certain Situations 175

Unit IV Negotiable Instruments Act, 1881

21. Negotiable Instruments Act, 1881 177

Introduction 177 Negotiable Instrument Defined U/S 13(1) and (2) of Negotiable Instruments Act 177What is a Negotiable Instrument? 178 Characteristics of a Negotiable Instrument 179 Presumptions 179Types of Negotiable Instruments 180

Inchoate Stamped Instrument 180 Fictitious Bill 181

Holder 181Holder in Due Course 181Rights of a Holder in Due Course 181

Different Types of Negotiable Instrument 182Promissory Note 182Bill of Exchange 184

Cheque 186A Draft and a Cheque Distinguished 187Marking of a Cheque 187

Different Types of Cheque 188Types of Crossing 189

Who can Cross a Cheque? 190

22. Endorsement 193

Endorsement 193Typesof Endorsement 193Rulesof ValidEndorsement 194EndorsementtomakeanInstrument‘Not Negotiable’ 195

23. Dishonour of a NegotiableInstrument 197

Dishonour 197


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xvDetailed Contents

Dishonour by Non-acceptance 197Dishonour by Non-payment 2198Notice of Dishonour 198 Duties of the Holder of an Instrument upon Dishonour of the Instrument 199

Noting (Section 99) and Protest (Section 100) 200

Noting 200 Protest 200

Noting and Protest is not Applicable to Cheques 200

Acceptance for Honour (Section 108) 201Payment for Honour 202Compensation for Honour 202Dishonour of Cheques 203

Unit V Consumer Protection Act, 1986

24. Introduction to the Consumer ProtectionAct, 1986 207

Introduction 207 United Nations Guidelines for Consumers’ Protection 207Objectives of the Consumer Act, 1986 208

Consumer Protection Act, 1986 208

Importance of Consumer Protection Act 208 Appropriate Laboratory, Complainant, Complaint, and Consumer 208 Consumer Dispute, Defect, and Deficiency 209

Goods 210Person [Section 2 (1) (m)] 210 Restrictive Trade Practice [Section 2(1)(nnn)] 211Service [Section 2(1) (o)] 211Spurious Goods and Services 211Trader [Section 2(1)(q)] 211Unfair Trade Practices [section 2(1)(r)] 211

25. Consumer Protection Council—Composition and Objectives 213

Central Consumer Protection Council 213

Composition of Central Consumer Protection Council [Section 4] 213

Objective of Central Consumer Protection Council [Section 6] 213

State Consumer Protection Council 214 Composition of State Consumer Protection Council [Section 7] 214

Objectives of State Consumer Protection Council [Section 8] 214

District Consumer Protection Council 214 Composition of District Consumer Protection Council [Section 8A] 214

Objectives of District Council [Section 8B] 214

Consumer Protection Hierarchy 214

26. Consumer Dispute RedressalAgencies 216

Consumer Dispute Redressal Agencies [Section 9] 216 Composition of the District Forum [Section 10] 216 Jurisdiction of the District Forum [Section 11] 216 Power And Function of Different Agencies 217 What Type of Relief Available to the Consumer? 218

27. Manner of Lodging a Complaint 219

Procedure of Complaint 219Filing a Complaint [Section 9A] 219Findings of District Forum 219Implementation of Order 220

Appeals 220Appeals [Sections 15 and 19] 220

Appeal (Section 23) 220Final Orders [Section 24] 220 Limitation Period [Section 24A] 220Enforcementof Orders [Section 25] 221 Dismissal of Frivolous or Vexatious Complaints [Section 26] 221Penalties [Section 27] 221


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Detailed Contentsxvi

28. Limited Liability PartnershipAct, 2008 222

Introduction 222 Definition 223

Salient Features of a Limited Liability Partnership 223Who Can Be a Member? 225

Number of Membership 225 Partner 225 Designated Partner 225 Disqualification 226

Limited Liability Partnership Agreement 226

Incorporation of a Limited Liability Partnership 228

Advantages of Limited Liability Partnership 229 Disadvantages of Limited Liability

Partnership 229TheExtentof Liabilityof LimitedLiability Partnership and Partners 229Contribution of Partner 230 Financial Disclosure of Limited Liability Partnership 231 Winding Up and Dissolution of Limited Liability Partnership 231

Case Laws 233Multiple-choice Questions 238Chapter-wise Solved Question Answers 247Three Sets of Model Questions with Answers 284University Solved Question Papers for 2014, 2015, and 2016 316Two Sets of Model Question Papers (without answers) 323About the Authors 325


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xviiRoadmap to Business Laws

Roadmap to Business Laws

UNIT NO.: NAME TOPIC DETAILS CHAPTER

Unit 1: The Indian Contract Act, 1872

(a) Contract – meaning, characteristics and kinds, Essentials of a valid contract(b) Offer and acceptance (Definition, Rules, Communication and Revocation of offer and acceptance)(c) Consideration (Definition, Elements, Types, Rules), “No Consideration No Contract” and itsexceptions; Capacity to Parties (Definition and Types)(d) Consent, Free consent, Coercion, Undue Influence, Fraud, Misrepresentation, Mistake(e) Legality of objects and Consideration(f) Void and Voidable agreements – Definition, Types and Distinction(g) Discharge of a contract – Modes of discharge, Breach and Remedies against breach of contract(h) Specific Contracts - Contingent contracts, Quasi, Contract of Indemnity, Guarantee, Bailment,Pledges

3-10

Unit 2: The Sale of Goods Act, 1930

(a) Contract of sale, meaning and difference between sale and agreement to sell(b) Conditions and warranties(c) Transfer of ownership in goods including sale by a non-owner(d) Unpaid seller – meaning, rights of an unpaid seller against the goods and the buyer

11-14

Unit 3: Partnership Laws A. The Partnership Act, 1932(a) Definition – Partner, Partnership(b) Nature and Characteristics of Partnership(c) Types of Partners(d) Registration of a Partnership Firms and consequences of non-registration(e) Rights and Duties of Partners(f) Dissolution of firms – meaning and groundsB. The Limited Liability Partnership Act, 2008(a) Definition(b) Salient Features of LLP(c) Advantages and disadvantages of LLP(d) Differences between: LLP and Partnership, LLP and Company(e) Incorporation of LLP

15-20

28


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Roadmap to Business Lawsxviii

Unit 4: The Negotiable Instruments Act 1881

(a) Definition, Features, Types, Parties of Negotiable Instruments: PromissoryNote, bill of exchange, Cheque (Definition and Types)(b) Endorsement: Types of Endorsement(c) Holder and Holder in Due Course, Privileges of Holder in Due Course.(d) Dishonour of Negotiable Instruments: Modes, Consequences, Notice of Dishonour; Noting and Protesting(e) Discharge of Negotiable Instruments: Meaning and Modes

21-23

Unit 5: Consumers Protection Act, 1986

(a) Objectives and features of Consumers Protection Act(b) Definitions – Complainant, Complaint, Consumer, Consumer Dispute, Defect, Deficiency, District Forum, Person(c) Unfair trade practices(d) Consumer Protection Council (Central, State and District – their constitutions and objectives)(e) Consumer Dispute Redressal Agencies: Composition and jurisdiction of District forum, StateCommission and National Commission

24-27


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CHAPTER

6 Capacity of Parties to Contract

• Partiescompetenttoenterintoacontract• Personsincompetenttoenterintoacontract• Whoisaminor?• Whyshouldminorsbeprotected?• Lawregardingminor’sagreement• Minor’sliabilityfornecessaries

• Positionof aminor’sguardian• Companyshareheldbyaminor• Personsof unsoundmind• Other persons considered to be disqualified for

contract

Chapter Outline

INTRODUCTION

A contract must be made between the persons who are competent to perform the contract. This is the main essence of Section 11 of Indian Contract Act, 1872. Accordingly, every person entering into a contract must have the capacity to enter into a contract. Section 10 of Indian Contract Act, 1872, provides that ‘All agreements are contracts if they are made by the free consent of parties competent to contract.’ Section 11 of the Indian Contract Act regarding the competence of the parties provides or states that ‘Every person is compe-tent to contract who had reached the age of majority according to the law to which that person is a subject, and who is of sound mind and is not disqualified from contracting by any law to which he is a subject.’

PERSONS INCOMPETENT TO CONTRACT

According to Section11 of the Indian Contract Act, the following persons are not competent to enter into contract:

• Minors,• Persons of unsound mind, and• Persons disqualified by any law to which they are subjected to.

The above persons cannot enter into a contract. Any contract of which either party belongs to any of the above category is void.

Who is a Minor?

A person is considered a minor who has not reached the age of a major according to the Indian Majority Act, 1875. A major person has been defined in the Indian Majority Act, 1875, as ‘Every person domiciled in India shall be deemed to have attained his majority when he shall have completed his age of 18 years and not


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53Capacity of Parties to Contract

before. In the case, however, of a minor of whose person or property or both, a guardian has been appointed by a court, or of whose property the superintendence is assured by a court of words, before the minor has attained the age of 18 years, when he has completed the age of 21 years’(Section 3 of Indian Majority Act, 1875). Therefore, the age of majority in India is generally 18 years. The age of majority is to be determined according to the law to which he is subjected to. According to the act, a minor is a person who has not attained the age of 18 years. There are, however, two exceptions to this rule.

WHY SHOULD MINORS BE PROTECTED?

The minors are always unable to understand what is good and fair for them. They are very often exploited, and their properties may be taken away. Law provides that the court should be careful and protect them and safeguard their properties against unwanted interference into their interests because of their lack of knowl-edge and experience.

Nature of minor’s agreement

Section 10 of Indian Contract Act, 1872, requires that the parties to the contract must be competent and Section 11 of the Indian Contract Act provides regarding the competence of the parties that a person compe-tent to contract must be of the age of a major. In addition, it is clear that a minor cannot enter into a contract. The judiciary committee of the Privy Council in the year 1903 resolved the controversy of the role of a minor in a contract. In the case of Mohori Bibee versus Dharmodas Ghose (1903) 30IA 114; 30 ca l539, Sir Lord North observed that ‘minors are appearing in public life today more frequently than before. A minor has to travel, to get his dress tailored or cleaned, and to visit cinema halls. He has to deal with educational institutions and purchase so many things. In any one of such cases, if the other party to the contract could brush aside the minor on the ground that the agreement is void, a minor has to face much more trouble.’

LAW REGARDING MINOR’S AGREEMENT

An agreement with or by a minor is void and inoperative as initio

An agreement by a minor is void and inoperative. In the year 1903, the judiciary committee of the Privy Council declared that agreement by a minor is void and not enforceable in the case of Mohori Bibee Versus Dharmodas Ghose (1903) 30IA 114; 30 cal 539.

In this case, a minor mortgaged his property in favour of a moneylender to secure a loan of H20,000 out of which the mortgagee paid the minor a sum of H8,000. Subsequently, the minor sued for setting aside the mortgage, stating that he was underage when he executed the mortgage. Held, the mortgage was void and therefore, it was cancelled. Further, the moneylender’s request for the repayment of the amount advanced to the minor as part of the consideration for the mortgage was also not accepted. When giving the judgement, Sir Lord North observed that ‘looking at Section 11, their Lordships are satisfied that the act makes it essential that all contracting parties should be competent to contract and expressly provides that a person who by reason of infancy is incompetent to contract cannot make a contract within the meaning of the act. The question whether a contract is void or voidable presupposes the existence of a contract within the meaning of the Act, and cannot arise in the case of an infant.’

A minor can be promise or a beneficiary

A minor in whose favour a mortgage has been executed can get a decree for the enforcement of the mortgage. [Raghavachariah versus Srinivas 40 Mad, 308] Similarly, a promissory note executed in favour of the minor can be enforced.


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An agreement under which a minor has received a benefit can be enforced as against the other party. Any agreement for the minor’s education, service, or apprenticeship, and agreements that enable him to settle him in life are binding provided they are not detrimental to his interest.

Example D, an infant professional boxer, held a licence from the British Boxing Board under which his money was to be stopped if he was disqualified. D sued to recover it. Held, the contract was for his benefit and was binding on him.[Doyle versus White City Stadium (1985) 1 K.B. 110].

Example A minor under a contract of sale delivered goods to the buyer. Held, he was entitled to maintain a suit for the recovery of price. [Abdul Ghaffar versus Prem Piare Lal. AIR (1934) Lah 480]

Minor’s liability for necessaries

A person who has supplied necessaries to a minor or anyone whom the minor is bound to support can claim reasonable price for the necessaries and the minor’s property is liable for such payment. What is a necessary article is to be determined by the status and social position of the minor. What price is reasona-ble is to be determined by the circumstances, and the ‘reasonable price’ and not the ‘agreed price’ would be paid by the minor. The minor’s property is liable for the payment and the minor is not personally liable.

The subject of necessaries supplied to a person incapable of contracting is covered by Section 68 of the Indian Contract Act, which provides that ‘if a person incapable of entering into a contract, or any one whom he is legally bound to support, is supplied with necessaries suited to his condition of life, by another person, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person’. It is, therefore, the minor’s liability towards supply of necessaries does not arise out of contract.

Example Inman, an infant in the undergraduate college of Cambridge bought eleven fancy waistcoats from Nash. He was at that time adequately provided with clothing. Held, the waistcoats were not necessary, and hence the price could not be recovered. [Nash versus Inman (1908) 2 KB 1]. Learned Judge Fletcher Milton in this case observed that ‘the basis of the action is hardly a contract. Its real foundation is an obligation that the law imposes on the infant to make a fair payment in respect of needs satisfied.’

Law regarding compensation or restitution

A minor cannot be compelled to compensate for any benefit that he has received under a void agreement. Section 65 of the Indian contract act provides for restitution in the case of an agreement that is discovered to be void. However, it has been held in a number of cases that the court may, on cancelling an instrument at the instance of a minor, require the minor to make compensation to the other party. Section 41 of the specific relief Act 1877 empowers the court to do so. The provision of the act follows as ‘on adjusting the cancellation of an instrument, the court may require the party to whom such relief is granted to make any compensation to the other which the justice may require so.’ Section 41 of the specific relief Act 1877 provides in similar terms for cases where a contract is rescinded.

Example A minor sells a house for H10,000. Later, he files a suit to set aside the sale on the ground of minor-ity. He may be directed to refund the purchase money received by him.

He can always plead minority (no estoppel)

A minor who falsely represents himself to be a major, and thereby that minor induces another person to enter into an agreement with him can nevertheless plead minority as a defence of an action on the agreement. He cannot be sued either in contract or in tort for fraud because if the injured party were allowed to sue for fraud, it would be giving him an indirect means of enforcing a void agreement. There cannot be estoppels against a minor [Sadik versus Jaikishore (1928) AIR PC 1152]. In the English case R Leslie versus Shell, the Court of


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Appeal held that where an infant obtains a loan by falsely representing his age, he cannot be compelled to pay the amount of the loan as damages for fraud, nor can he be compelled in equity to repay the money. In India, however, it has been held that the court can direct the minor to pay compensation to the other party in such cases.

No ratification

A minor cannot ratify an agreement entered into by him when he was minor on attaining his majority. It is because a void agreement cannot be validated by any subsequent action. ‘An agreement by a minor is void ab initio’ [ Mahendra versus Kailash 55 Cal 41]. ‘Consideration that passed under the earlier contract cannot be implied into the contract that the minor enters on attaining majority.’ [Nazir Ahmed versus Jiwan Dass, AIR (1938) Lah. 159]. Consideration given by a minor is no consideration. If a new contract is entered into by the minor to compensate the previous agreement after attaining majority, the agree-ment is required to be supported by a fresh consideration. [S. Shanmugam Pillai versus K.S. Pillai. (1973) 2 SCC 312].

Example B, a minor, borrows H5,000 from D and executes a promissory note in favour of D. After attaining majority, another promissory note was executed in settlement of the earlier note. The second promissory note is void for want of consideration. [Indran Ramaswamy versus Anthiappa Chettiar, (1906) 6 M.L.J. 422]

Example K, an infant, speculated on the stock market and became liable to the stockbroker for £547. Subsequently, when he attained majority, he executed two bills for £50 each in satisfaction of the original debt. Held, K was not liable on the bills. [Smith versus King, (1895) 2B 543]

Services rendered by a person at the desire of the minor expressed during his minority and continued the same at his request after his majority from a good consideration for a subsequent express promise by him in favour of the person who provided the services. [Sindha versus Abraham, (1985) 20 Bom. 755]

No specific performance

There cannot be any specific performance of an agreement entered into by a minor. An agreement by a minor is void ab initio. A contract entered into on behalf by his parent/guardian or the manager of his estate can, however, be specifically enforced/performed against the minor, provided (a) the contract is within the scope of the authority of the parent/guardian/manager, and (b) for the benefit of the minor.

A minor cannot enter into a partnership

A minor cannot be entered into a contract of partnership, but he may be admitted into the benefits of part-nership with the consent of existing partners of an existing partnership.

No insolvency

A minor cannot be declared insolvent even if there are some dues payable from the properties of the minor. It is because he is incapable contracting debts.

A minor can be an agent

A minor can act as an agent of a principle and can bind others except himself. A minor becomes an agent by negotiating an agreement with a major person. No liability is arising out of the agreement against the minor, but the agreement can be enforced against the major person.

A minor is liable in tort (a civil wrong)

A minor is liable for tort, but where a tort arises out of a contract a minor is not liable in tort as this can be an indirect way of enforcing an invalid contract. [Leslie versus Shiell (1914) 3 K.B.607]


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MINOR’S LIABILITY FOR NECESSARIES

A minor is liable to pay out of his properties for necessaries supplied to him. A person who has supplied nec-essaries to a minor or anyone whom the minor is bound to support can claim reasonable price for the neces-saries and the minor’s property is liable for such payment. What is a necessary article is to be determined by the status and social position of the minor. What price is reasonable is to be determined by the circumstances, and the ‘reasonable price’ not the ‘agreed price’ would be paid by the minor. The minor’s property is liable for the payment and the minor is not personally liable.

The subject of necessaries supplied to a person incapable of contracting is covered by Section 68 of the Indian Contract Act, which provides that ‘If a person incapable of entering into a contract, or anyone whom he is legally bound to support, is supplied by another person with necessaries suited to his condition of life, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person’. It is, therefore, the minor’s liability towards supply of necessaries does not arise out of contract. The term ‘necessaries’ has not been defined in the Indian Contract Act. It has been defined by The English Sale of Goods Act 1893 in Section. 2 as ‘goods suitable to the condition in life of such infant or other person, and to his actual requirement at the time of sale or delivery’. Such goods need not necessarily belong to a class of useful goods, but they must be (i) suitable to the position and financial status of the minor, and (ii) necessaries both at the time of sale and at the time of delivery.

What are necessaries for a minor is determined by their status and social position and will include the followings:

1. Physical goods not only for bare necessaries but also for reasonable comforts and luxuries to which theminor is habituated. Not only bare necessities like bread and butter, shelter, cloth but also a watch or abicycle may be considered to be necessaries considering his status. An engagement ring may be a neces-sary, but a vanity bag bought for her fiancée is not.

Learned Judge Martin B. in a case [Byrant versus Richardson, (1866) 14 L.T. 24] said that ‘ a coat of superfine broadcloth may be a necessary for the son of a nobleman , although it is impossible not to say the coarse material of a ploughman’s coat would be sufficient to keep a nobleman’s body worm’ The learned Judge Bramwell, B. said in [Ryder versus Wombell, (1868) L. R. 3 Exch. 90] that ‘earrings for a male, spectacles for a blind man, a wild animal. . .. . .. a daily dinner of turtle and venison (the edible flesh of a wild animal taken by hunting) for a month for a clerk with a salary of one a week’ could not be necessaries.

2. Services required by the minor could be a teacher for him, a nurse for an infant, etc. It has been held thatreasonable expenses for this purpose will include education, training for a trade, medical advice [Chappelversus Cooper,(1844) 13M & W 252], provision for expenses for marriage of the minor, marriage of hissister, expenses legal advice and of proceedings for defending him in civil and criminal proceedings,funeral expenses of his near relatives, and expenses for sradh ceremonies of his ancestors.

Example 1 A supplied B, a minor reasonable food necessary for his consumption. Now A can recover the price from B’s property.

Example 2 A minor G entered into a contract with R, a renowned Billiard player, for training and advised him during a world tour, and agreed to pay him money. R spent time and money in arranging matches. Held, G was liable to pay as the agreement was for necessaries and was ‘for teaching, instruction, and employment and was reasonable and for the benefit of the infant’. [Roberts versus Gray. (1913) 1 K.B. 520]

Example 3 When a minor is engaged in a business, the contracts entered into by him for business purposes and cannot be considered as necessaries and the contracts are not binding on the minor.

3. Loans were taken by a minor for obtaining necessaries. In such cases of requirement, a minor incursloan for his necessaries and that minor is bound to repay the loan. The lender can recover the amount


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from the property of the minor. However, the minor is not responsible personally.[Martin versus Gale, (1876) 4 Ch.D. 428]

POSITION OF A MINOR’S GUARDIAN

A minor cannot enter into an agreement. Even if he enters, it is not enforceable. However, an agreement by a guardian on behalf of a minor stands on a different footing. It is valid and enforceable provided the obli-gations undertaken are within the powers of the guardian. The powers of a guardian are determined by the personal law of the minor and by the Guardian and Wards Act. An agreement entered into by the guardian is binding on the minor if it is for the benefit of the minor or is for a legal necessity.

COMPANY SHARES HELD BY A MINOR

A minor cannot apply for a share in a company. If by mistake, a minor is allotted a share and his name is recorded as a member in a company, the company can rescind the transaction and remove his name from the register. The minor can also repudiate the transaction and get his name removed from the registrar. Where a minor has become a member and, after attaining a majority, he received and accepted dividends, he will be stopped from denying that he is a member. [Fazalbhoy versus The Credit Bank of India 39 Bom. 331]

PERSONS OF UNSOUND MIND

It is essential that the parties involved in a contract are of sound mind and capable of understanding the terms and conditions of the contract and their interests. Section 12 of the Indian Contract Act is related with the provisions regarding what is a sound mind for the purpose of contracting. It provides/states as follows;

(a) A person is said to be of sound mind for the purpose of making a contract, if, at the time when he makes it, he is capable of understanding it and forming a rational judgement as to its effect upon his interests;

(b) A person who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind.

(c) A person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind.

Examples

(i) A person in a lunatic asylum, who is at intervals, of sound mind, may contract during those intervals.(ii) A same person, who is delirious from fever, or who is so drunk that he cannot understand the terms

of a contract, or form a rational judgement as to its effect on his interests, cannot contract while such delirium or drunkenness lasts.

Soundness of mind depends on the following issues:

1. Incapacity of a person to understand the subject matter of the contract, and2. Inability of a person to form a rational judgement as to its effect upon his interest involved in it. If a

person suffers from both, he is suffering from incapacity and considered to be a person of unsoundmind. Whether a person is of unsound mind or not is a matter to be decided by the court. If a personrelies on unsoundness of mind, he has to prove it sufficiently before the court.

Unsoundness may arises from insanity or lunacy, idiocy, drunkenness, and similar factors. Mental decay brought about by old age or disease also comes within the definition.


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Lunacy or insanity

A person is considered to be lunatic if he has certain imbalances of mind. This may due to a disease of the brain or mental strain or old age. As a consequence, his mental powers are deranged so that he cannot form a rational judgement on any subject. Lunacy or insanity can be cured, but there are cases where he suffers from intermittent intervals of sanity and insanity. A contract enter into by such a person is valid if it is done during the period when he is of sound mind.

Idiocy

An idiot is a person who has totally lost his mental balance permanently. That person cannot exhibit any understanding even in normal matters. Idiocy is incurable and any contract with an idiot is void.

Drunken or intoxicated person

A person under the influence of alcohol cannot take any decision in the normal process. Drunkenness or intoxication produces temporary incapacity to contract. A person when he is drunk his mental faculties are clouded for the time being, and he becomes incapable to participate in a contract temporarily. The position of an intoxicated person is that of a lunatic.

OTHER PERSONS CONSIDERED TO BE DISQUALIFIED FOR CONTRACT

There are some other persons who are also considered to be disqualified for entering into a contract.

Alien enemies

A person who is not a citizen of India is an alien. He may either be an alien friend or an alien enemy. An alien friend is a person whose state is not at war with India. An alien enemy is a person who is a citizen of a country is at war with the Republic of India. Contracts with an alien friend is valid subject certain restrictions. An alien living in India is free to enter into contracts with citizens of India. Contracts with alien enemy may be discussed under (a) contracts during the war, and (b) contracts made before the war.

During the continuance of war, an alien enemy cannot enter into a contract with an Indian subject. Contracts made before the war may either be suspended or dissolved. For this purpose, if an Indian subject is residing voluntarily in a hostile country or carrying a business in that country, that person will be considered as alien enemy and any agreement with such person will be considered unenforceable.

Foreign sovereigns, diplomatic staffs

A foreign sovereign can enter into an agreement with an Indian subject. However, such agreement cannot be enforced unless they voluntarily submit to the jurisdiction of the local court. An Indian citizen has to obtain a prior sanction of the Central Government for proceeding against them in our courts [Meghell versus Sultan of Johore, (1894) 1 Q.B 149].

Foreign sovereigns and governments can enter into contracts through their agents who are residing in India. In such case, the agent becomes personally liable for the performance of the contract.

Companies and corporations

Companies and corporations are body corporate and considered to be artificial persons created by law, hav-ing a legal existence apart from its members. A corporation formed by an act of legislature has the capacity to contract subject to the act of its formation. The contractual capacity of a company is regulated by the terms of the Memorandum of Association and the provisions of the Companies Act. If it exceeds its powers, the contract is ultra vires and is void.


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Professional persons

In England, barristers are not allowed to sue for realizing their fees. Similarly, the members of the Royal College of Physicians cannot sue for their fees. They can, however, be sued or sue for implementation of any contract other than professional one. In India, however, there is no such restriction.

Insolvent

An insolvent also barred for entering into a contract.

Convicts

A convict is incapable of entering into a contract so long as he is in custody. His incapacity comes to an end when the period of sentence comes to an end.

Women

In India, there is no difference between a man and a woman so far as the contractual capacity is concerned. Women married or single can enter into contracts, deal with their properties, and even a married woman can bind her husband’s properties for necessaries supplied to her.

KEYWORDS

Alien enemies, Insanity, Persons incompetent to contract, Minors, Majors, Liability for necessaries, Restitution, Estoppel, Ratification, Specific performance, Insolvent, Tort, Unsound mind, Lunatic, Competent to contract, Convicts, Beneficiary, Idiot.

EXERCISES

Short Questions (2 marks)

1. What do you mean by capacity to contract? [CU, B Com2008]

2. Who is a minor? [CU, B Com 2003]3. Can a minor be declared be insolvent? [CU, B Com 2007]

Medium Questions (8 marks)

1. Discuss the validity of contract by minor. [CU, B Com1993]

2. ‘Minor’s agreement is void ab initio.’ Discuss [CU, B Com2012]

Long Questions (16 marks)

1. What do you understand by capacity to contract? Whatis the effect of any agreement made by persons notQualified to contract? [CU, B Com 2008]

2. Discuss the validity of contract by minor. [CU, B Com.1993]

SELECTED READINGS

1. Kapoor, N.D. (2009), Elements of Mercantile Law. Sultan Chand & Sons, New Delhi.2. Garg, K.C., V. K. Sareen, and Mukesh Sharma (2003), Business Regulatory Framework, Kalini Publishers, New Delhi.3. Sen, Arun Kumar and Jitendra Kumar Mitra (2008), Commercial Law including Company Law, World Press, Kolkata.4. The Indian Contract Act, 1872, Bare Act, Universal Law Publishing Co. Pvt. Ltd.5. Vechalekar, Dr N.M. (2011), Business Law, Everest Publishing House, Pune.6. Singh, Avtar (2000), Law of Contract. Eastern Book Company, Lucknow.


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Business Laws Oxford University Press

Documents

Transcript of Business Laws Oxford University Press